Some reports tell us that Europe is getting close to a deal that will save Greece and other ‘Olive Country’ debtors. Maybe, but IMF chief Christine Lagarde says they have a $3 trillion hole to fill. That’s probably the one and only thing she is right about. The size of the problem is big…bigger than anyone realized.

Some of the biggest banks, for example, have tried to buy time by underestimating the size of their losses. Societe Generale has written off 21% of its Greek debt. But Mr. Market says it’s down more than 50%. And what about the rest of them? Spain, Italy, Portugal…they’ve got big losses too.

“You can’t trust Greeks,” said a friend last night. “That’s just the way they operate. It’s probably some Mediterranean genetic code. The Southern Italians are just as bad. It’s crazy to think that they can operate with the same currency and the same interest rates as the Dutch and the Germans.”

“Well, I’m not so sure…” we replied. “People from California and New York share the same currency.”

“Yeah…and you can’t trust either one of them, either.”

“And what about Ireland? They don’t even have olive trees. But they’re probably in as deep a hole as anyone.”

“Yeah…but you can trust the Irish. They’re not crooks. They’re just stupid.

“I don’t know…but this whole mess is going to explode. People owe too much money. You can talk about bailing them out, but that doesn’t make the debt go away. It just moves it around. And even if the Germans could and would pick up the whole tab, so what? It’s still got to be paid or written off.

“I don’t know what they can do…except what Japan has done. The Japanese savers lent money to the government so it could keep spending and keep the economy going.”

Our friend was making a good point. Debt doesn’t go away. Even if you succeed in managing it, you still have to take the debt and subtract it from someone’s balance sheet. Excess debt is a like a hand-grenade after you’ve pulled the pin. You can pass it around the table. But, it’s going to explode anyway.

In theory, it doesn’t matter who has the debt. Debt is debt. It is a claim on wealth. Current wealth or future earnings. When growth rates decline, debt gets heavier. Growth would make the debt seem lighter and smaller. Without growth, debt must be subtracted from current wealth…not future wealth. That’s what a write down or default is all about. The debtor admits he cannot pay. The creditor admits that he has been a fool…

Many economists have the wrong idea about debt. For every debit there is a credit, they say. Don’t worry about it.

But what about when the credit goes bad? The lender lent money. The debtor used the money to buy resources…and use them up. Then, the debtor has no more resources…the debt can’t be paid…and the creditor realizes that he should have held onto his money. The credit disappears…the debt disappears…the resources have long since disappeared…and the lender blows his brains out. He’s broke and disgraced.

Well, he would be taking this thing far too seriously. But sometimes people get more worked up about money than they should. C’mon…it’s just a game! It’s supposed to be fun…

Besides, the Japanese have been playing the game for two decades. Instead of forcing borrowers to admit they couldn’t pay, the Japanese feds lent everybody money…and spent a lot of money themselves. This kept the economy turning over.

Our Daily Reckoning best guess is that that is what Europe and America will do too… They will go where the Japanese went.

But wait…what happened to all that money that Japanese savers lent to the government? How will they get it back? Doesn’t the Japanese government get stuck holding the hand-grenade…and won’t those poor mom and pop savers have to admit that they were fools?

Yes…of course. But we’ll worry about that later…

What a delight it is to have an empire!

Do the Swiss get to send out drones to kill people they don’t know in countries they’ve never been? No! The poor yodelers go around with long faces and visit their shrinks. Americans have troops in 170 countries. Where are the Swiss? Only in Switzerland and the Vatican. Alas, they will never know the joys of nation building and people murdering.

We hear that Ron Paul was booed in the Republican presidential debates. Why? He suggested that we get out of the empire business, bring the troops home and become a civilized nation again. What a party pooper…a wet blanket…a killjoy!

An empire is so much more entertaining. We already have three wars going on…at last count…and quasi-wars in several other places.

Having an empire is like having a football team that plays for mortal stakes. It’s fun to watch…at least when your team is winning. And now, Team USA is kicking butts all over the planet. That’s why at football games, for example, (or so we’ve heard) images of the football team are sometimes mixed with images of US combat troops. The flag flies. The lumpen salute. They don’t want to think about it; they just want the homeland team to win!

And we have so much to look forward to. At least, we moral historians and ironic economists do. Gone is habeus corpus…forgotten is the presumption of innocence…into the wastebasket has been thrown the spirit of liberty. All that guff is in the past. In their place are hit squads and precision guided assassins. Now, the killer drones are only used abroad. But as the empire matures it is only a matter of time before they are used on more dangerous enemies — those at home! Yes, dear reader, if you can kill US citizens overseas, without any charges filed, let alone proved, you can certainly kill them where they might do the most damage — in the homeland. It is just a matter of time before the drones fly in Los Angeles and Baltimore, so watch out, Ron Paul.

You want to know what lies ahead? Just read the classics…particularly the history of Rome. Empires have roles to play too. They have scripts to follow. They have plots they must respect…and destinies they must fulfill.

For example, in the US, it is probably only a matter of time before a weak president is replaced by a strong emperor. A senate may be able to rule a constitutional democracy, but a real empire needs a real emperor, someone who can make decisions without getting caught in the gridlock of Congress. Besides, the public will love it. Yes, a popular general is sure to cross the Potomac sooner or later…from the Pentagon to the White house. The crowds will cheer. Garlands will be hung. Flowers will be strewn in his path. Finally, someone will bring order to the US…slay its enemies and reward its friends with war booty (military contracts).

And then, of course, there will be civil war. Once a government can be taken by force, rather than the fraud that is customary in democracy, force will be used to compete for it. Perhaps the Democrats will have their military men…the Republicans will have their own forces. They will fight it out for control of the empire.

And then, to stop the killing and the destruction, the army will get together and decide to put its own man in the top position. Inevitably, this will lead to more struggles for power…

..and much comedy. The military forces will choose even bigger morons than the voters. They will come and go quickly…with two, three…maybe a dozen new leaders in a single year. Some will be dangerously incompetent. Others will be dangerously able. Some will be lunatics.

How long will it be before an American Caligula appears? Will he force the senators’ wives to become prostitutes? Will he proclaim himself a god? Will he be murdered by his own guards and companions? We hope so.

Of course, it won’t the America we knew. Or even the one we want. But it should be a treasure trove for future historians and stand-up comedians.

Below, a former Assistant Secretary of the Treasury, from the Reagan administration, pinpoints the moment when America, as we knew it, died…

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.

Howdy Bill That is an interesting scenario, that could well play out. However you may well be missing the much bigger economic drama or tragedy of our time. So much as the rich US Southern states grew fat on the mis-pricing of their economic inputs, so too follows modern China steadily along this path. Though the social parallels differ, the obvious economic parallel is a spot on replication of that sad time. The Southern plantation owners including both the Upland Southerners and more so the Deep Southerners, accumulated a vast wealth and capital through deep savings and factor price reductions… Read more »

“go where the japanese went”……you wish. when Japan bubble burst there was ongoing massive demand for Japanese products while raw material costs were still low (crude was less than one quarter the current price). Margins were high, revenues were rising and competition was still limited in key industries. GDP kept growing, whereas US GDP post bubble has been in the tank. Japanese personal income growth was maintained whereas in the US it has started to go into reverse as of August 2011. US today has none of those luxuries. Only a printing press that’s getting squeaky. If only we were… Read more »

Never mind about America’s Caligula, Bill. China, becoming impatient for repayment of its loans, will finish off the USA long before then. Or will it be the outbreak of World War III which will be a pyrrhic victory for the winner.

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